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The Macro Viewpoint - EM, China and oil
25 Plays3 years ago
In this edition we assess the challenging outlook for emerging markets, look at what rising COVID-19 cases mean for China’s economy and find out why there is some welcome relief in the oil markets. Disclaimer: To stay connected and to access free to view reports and videos from HSBC Global Research click here.
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Transcript
Introduction
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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Thank you for listening.
Weekly Highlights
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You're listening to the HSBC Global Research Mac Reviewpoint, our weekly review of the key reports from our economists and strategists across the globe.
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Coming up this week, we assess how a growing list of challenges are creating a precarious mix for emerging markets.
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We look at the implications of rising COVID-19 cases and lockdowns in China.
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And we find out why there is some welcome relief in the oil markets following a period of heightened volatility.
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This podcast was recorded on Thursday, the 14th of April, 2022.
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Our full disclosures and disclaimers can be found in the link attached to this podcast.
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Hello, I'm Aline Van Dyne.
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And I'm Piers
Emerging Markets Challenges
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Butler.
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Emerging markets endured a torrid first quarter as it discounted a raft of negative news flow.
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Murat Olgen, Global Head of Emerging Markets Research, has been looking at whether we can expect an improvement over the coming months.
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Murat, welcome to the podcast.
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Thank you.
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Why did EM assets perform so poorly in the first quarter?
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Yes, it was indeed the worst quarter for EM assets in over a decade, if you exclude the start of the pandemic.
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That's because the investment backdrop is in a state of flux.
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Emerging markets have been pricing in a very long streak of stagflationary shocks.
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And there are other issues that are impacting EM negatively, like slowing global growth.
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Continued impact of the pandemic in terms of supply disruptions, global liquidity is getting less supportive for EM, global rates are higher and commodity prices are all elevated.
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And obviously the picture is now even more complicated with the war between Russia and Ukraine and all the near and long term uncertainties it causes.
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Do things look any easier going forward?
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Well, unfortunately not, because this backdrop likely means more of the same, a continued deterioration of EM's growth and inflation mix.
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As a matter of fact, our economists have recently revised on the growth trend
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and revised up their inflation forecast for EYM pretty substantially.
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Also in the emerging market sentiment survey that we released in March, investors turned clearly more negative, cash levels went up and the risk appetite score took a dive.
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The Fed rate hikes and the quantitative tightening
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They still pose the biggest risk to EM in the survey.
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And also the expectations about global inflation falling to more recent levels are fading.
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There are significant cost side pressures and continuous supply disruptions.
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They probably argue for further monetary tightening by EM center banks.
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And in the meantime, the sought after support for EM from better mainland China growth is yet to materialize.
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So in summary, there is little support for EM from a top down global macro angle
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If anything, actually, the drags are getting even more powerful.
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And are there any divergences among emerging markets themselves?
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Actually, there are big divergences beneath the surface.
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The emerging market economies with prudent macro policy mix that are showing the result to arrest inflation pressures or where inflation pressures are already relatively more muted, they're doing quite well, especially if they are tied to the commodity story.
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They offer investors not only a risk premium buffer, but also terms of trade support.
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Yes, the commodity prices are rallied a lot and global global and mainland China growth do not bode well with high prices.
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But there are many other dynamics at play.
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And also the large trade gains are already in the pipeline for the commodity producers that are helping not only with external balances, but also to some extent with the growth outlook and inflation pressures.
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Moret, thanks very much.
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Thank you.
Impact of COVID-19 in China
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Let's head to China now where COVID-19 cases have continued to rise.
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And with Shanghai accounting for much of the increase, strict lockdowns across the city have been brought in by the authorities.
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Let's get the latest from Shan Shan Song, economist for Greater China.
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She joins us from Hong Kong.
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Shan Shan, one thing we can safely say about the current wave in China is that the finance capital
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Shanghai is at the front and centre.
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Well, yes, that's true.
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More than 25,000 new cases per day were seen recently, and more than 90% of them are from the city of Shanghai.
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A great majority of them are asymptomatic, and there is no clear sign of Peking yet.
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In terms of the rest of the nation, new cases are relatively scattered, and there are also small-scale flare-ups in peripheral provinces, but so far, the condition is under control.
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Paint us a picture of what life is like for the average Shanghai resident right now.
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Well, Shanghai has been put into lockdown for more than two weeks.
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The first 10 days is for massive COVID testing at city level.
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So now, based on the testing results, the city has grouped all residential units into three risk categories.
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Great majority of the city is now in the top two level risk groups, i.e.
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home isolated or in community-based quarantine.
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And in terms of rest of the nation, the residential units are put into third level risk groups.
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The personal movement is under strict control, like only one person per household is allowed to go out once a day, the necessities purchase, etc.
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Also, the city is under close monitoring with frequent COVID testing.
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There will be adjustments based on the testing results every week or two.
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Other than Shanghai, where are cases being seen in China and what containment measures are being taken?
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In a few cities like Jilin and Changchun, where more than 900 cases were still seen every day, lockdown is still in place.
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But the lockdowns are relatively confined within residential unit level.
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Outdoor activities and personnel movement is also discouraged.
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Take Guangzhou, for instance.
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They have shut down in-person classes at primary and middle schools and shift to online classes.
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And also they discourage local residents from leaving the city unless absolutely necessary.
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What sort of economic impact is this having?
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Well, the impact is definitely on both production and consumption.
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In terms of production side, major electric vehicle supply chains were forced to suspend production.
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And also there are highways shutting down in many provinces.
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Unlike previously, at this time, the disruption is more nationwide from the look of national level production and transportation data.
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And of course, the impact is on consumption too.
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We can see that consumer sentiment has been dampened a lot and people are having more of an uncertainty over the outlook of the future.
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Caixin Services PMI fell to two years lowest point.
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Real estate transactions also fell to lowest level in recent years.
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And what can the central government do to offset these economic headwinds?
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Well, the headwinds are huge, and they are huge difficulty to meeting the 2022 GDP goal, which was set at around 5.5%.
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But in order to make it achievable, there will be more stimulus during the next few weeks, if not days.
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So first of all, stepping up fiscal stimulus to engineer a rebound in infrastructure investment will likely do the heavy lifting.
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As we can see, while the local government special bond issuance has quickened the pace so far,
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There is also need for broad-based monetary easing in terms of rate cards and triple-R cards.
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This will act as a strong signaling effect to restore businesses and household confidence.
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There will also be more targeted relending tools.
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These will be targeting key areas, say, high-end manufacturing, green investments, and also the weak links of the economy, say, the small and medium-sized enterprises, services sector, etc.,
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And also in terms of poverty policies, at local level, the restrictions on purchasing have been easing, especially in third-tier cities and less popular second-tier cities so far.
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And we believe this will continue in the rest of the year.
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But restrictions in first-tier cities will likely remain relatively strict.
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Shan Shan, thanks very much.
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Thank you very much.
Oil Market Dynamics
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It's been a volatile period for oil markets.
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Brent prices spiked to around $130 a barrel in March following Russia's invasion of Ukraine, before falling back more recently to around $100 a barrel.
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Gordon Gray, Global Head of Oil and Gas Equity Research, has been assessing the latest developments.
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Gordon, welcome to the podcast.
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Thank you.
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So, Gordon, firstly, let's have a look at the supply side of the equation.
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What's happening in terms of Russian oil supply?
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Well, we've had a whole series of measures taken against Russia.
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And so far, in terms of the March data, Russian production hasn't actually fallen much at all.
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At the start of April, there were signs of a more significant half a million barrels a day, at least, decline in production.
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But I suspect there are some much bigger declines to come.
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Because what we've seen so far is firstly production holding up because much of that production has been going into storage.
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But secondly, many of these measures to stop either companies or countries buying Russian crude haven't yet fully taken place.
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So we can see the Russian outage growing to potentially two, three million barrels per day in the coming few months, offset by some incremental buying, but still a net loss to the market that could be one or two million barrels per day.
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Now, there was an expectation that US shale oil production would ramp up to sort of compensate, but perhaps because of what's happened in the past, that ramp up has been more disciplined and slow than expected?
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It is more disciplined, but it's coming.
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So with these sorts of high prices, even with capital discipline, we think we could probably see growth coming out of the US supply side of a million barrels per day plus this year.
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And on top of that, OPEC plus is continuing the unwinding of its cuts in a very steady manner.
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We think that group, again, ex-Russia, could probably increase supply by the best part of a million barrels per day by the middle of the year too.
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But that presents its own problems in that by mid-year, we think OPEC's spare capacity will have become, by historic standards, extremely low, a little more than 2 million barrels per day.
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So that's the supply side of the equation.
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What's the outlook in terms of demand?
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There's a lot of talk about the prospects of economic growth slowing down.
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Is that going to have a material effect in terms of oil demand?
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Well, we're already seeing some signs of it.
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On the one hand, there's the direct effect in China of the renewed lockdowns.
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The other important factor is price elasticity of demand is really starting to hit in certain areas.
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So particularly in the US, gasoline demand has been counter-seasonally, flat to down.
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Diesel demand has been coming off its recent highs.
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So some real near-term signs that price levels around where they currently are for products are seriously starting to hamper demand growth.
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So if we put this all together, what is your outlook in terms of the oil price?
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Well, putting it all together, I think you add the loss of supply from Russia, new supply from the US, from OPEC, some demand weakness.
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You still get a market that is extremely tight.
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And what it needs and what it's now getting, of course, is these releases from strategic government controlled reserves.
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And those, I think, in practice could amount to an unprecedented level of maybe a million pounds per day for the next six months.
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But when we look at supply demand balances, those strategic reserves are desperately needed.
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to prevent the market overheating further and to keep prices under control.
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So all in all, we see a very firm market for the foreseeable future.
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Gordon, thank you very much for that update.
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I'm sure we will have you back on the podcast soon enough.
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Thank you very much.
Conclusion
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So that's all from us today.
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Thank you to our guests Murat Olgan, Chan Shansong and Gordon Gray.
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Thanks very much for listening.
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We'll be back again next week.
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Thank you for listening today.
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This has been HSBC Global Viewpoint Banking and Markets.
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For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.